News & Insights

The #1 Thing That Most Executives Aren’t Doing With Their Stock Options and Executive Compensation Plans – and What It May Be Costing You

by Jim Freeman, CFP® on 10/23/2018

Executives are constantly overlooking the automation of their stock options - here's how to do just that.Executives who are time-constrained yet serious about reaching their financial and investing goals commonly overlook one important factor: automation. Set up your plan so that it will be automatically executed without you having to remember what decisions were made. Automate, automate, automate! Here’s why.

A Typical Executive’s Financial Snapshot

Let’s say that you are an executive for a successful company that offers the following executive compensation:

  • Salary & Bonus $350,000
  • Restricted Stock Units (RSUs) of $150,000 annually
  • Stock option grants annually
  • A deferred compensation plan
  • An employee stock purchase plan (ESPP)
  • A matching 401k plan

We also assume your portfolio is overweighted to your company’s stock and you’d like to gradually reduce this overweight. In addition, let’s suppose you are in a high tax bracket and you’d like to reduce your taxes if possible during your peak earning years. You also want to begin saving money for your kid’s college costs, have your mortgage paid off in 10 years, keep your spending to $200,000 per year and aggressively reduce your stock option holdings if your company stock hits certain price targets.

If you’re doing this all manually, as most executives are, you may not realize how much time you are spending on tasks that could easily be achieved in a fraction of the time. In addition, automation reduces the risk of error.

The Automation Advantage

So how could an executive go about reducing the amount of manual work that is done in their financial and investment planning? Here is how this might look.

  1. Sign up for automatic deductions to maximize your 401k contributions. This can easily be done through your 401k account provider.
  2. Sign up during your open enrollment to maximize (10% of salary is the typical max) your ESPP purchases since they provide you the opportunity to buy your company stock at a discount of 15% or greater.
  3. Sign up to defer 50% of your salary and bonus into your deferred compensation plan. This should save you over 60k in taxes assuming you are in a state and federal marginal tax bracket of at least 35%. Deferring 50% of 350k would leave 175k for living expenses but from this 175k you’ll have to deduct 401k contributions, ESPP contributions, and taxes. Let’s assume after these deductions you’d be left with roughly 80k to 100k for expenses. This will leave you short of the 200k you need for your spending needs. We’ll tell you later how to get these funds in the most tax efficient manner possible.
  4. Place limit orders to sell a specified number of stock options at various predetermined price targets. This will help you avoid missing sales opportunities because you are too busy and finally it will move you toward holding a more diversified investment portfolio.
  5. Set up an automatic mortgage payment that will pay off your mortgage in 10 years and set up fixed monthly contributions to 529 college plans for your kids.

As you can see, there is enormous potential to save time using simple technology that is probably already in place for most executives who work at mid to large sized companies.

Some Manual Execution is Still Needed

As mentioned earlier the above plan leaves you short of funds for living expenses. The most tax efficient way to raise this cash and diversify your portfolio at the same time is to sell your RSU grants as soon as they are received. RSUs are taxable upon receipt whether you hold them or not, so selling them will not increase your taxable income above what it already is. Selling RSUs is a manual process but you won’t forget it because if you do, you’ll be unable to pay your bills.

You should also set up all of your expenses and credit cards to be paid automatically. If set up properly, at the end of the year you’ll have executed your plan without paying much attention to it. Not only that, but you may end up spending less than your target of 200k since having to sell investments to make funds available for expenses can be a natural spending deterrent for many.  

Automate the Tracking of your Financial Position and Income and Expense

With today’s technology it is easy to automate your financial life, and doing so allows you to see all of your accounts in one place as well as to more efficiently track your income and expenses. Our firm now uses the robust eMoney platform to help our clients accomplish this.

Spending time on the front end to get such technology set up properly will save you time in the future as well as providing you a more telling look at your finances on an ongoing basis.

posted in BlogInvestmentsPersonal Finance

Blog Topics

Featured Literature

Search

Subscribe

Receive updates by email.

Disclaimer

Posts are general in nature and do not constitute the rendering of legal, investment, accounting or other professional advice.